Hiding contingency costs?

Ashley Friedlein Staff
CEO at Econsultancy

15 November 2000 07:31am

Here's a question I'd be interested in getting other project managers' feedback on. Should you separately cost out and budget contingency costs or should they be hidden as a 'buffer zone' within the costs of the main budget?

One argument would say that all costing should be transparent to the client and bringing out the contingency costs makes it clear to the client that there are potential areas of cost which you cannot be certain about at the outset.

Another argument would say that it is always prudent to leave some room for manoeuvre on all costings and that by making these 'buffer' costs transparent to the client you risk having them stripped out by the client who would argue 'surely you know how much it will cost - I want a fixed budget'.

Yet another argument says that you should budget at the actual costs you think the project will incur (i.e. no buffer zone) and you don't include contingency costs but you do heavily caveat the budget in the almost certain knowledge that the caveats will be breached allowing you to charge additional amounts.

Personallyl, I would always favour and recommend the total transparency route. In practice, however, I suspect it really comes down to your relationship with the client and knowing how they think and prefer to operate. Certainly I would say (as I do in my book) that you would be foolish to leave absolutely no room for manoeuvre on the budget.

What do other people think?

Ashley
Joe Friedlein Enterprise
Director at Browser Media

16 November 2000 09:39am

The key to this issue is most definitely the relationship that you have with the client.
Personally, I believe the most successful way of charging for work is on a time and materials basis, with complete transparency(i.e. showing time sheets) on the part of the agency - this way, the agency receives payment for the work they have done and the client can see exactly how much work has gone into their project and will hopefully therefore not feel as though they are being ripped off if the costs are high.
If this method of costing is agreed on by both parties, the only real area for debate will be over the rate card, which is for the client services teams to sort out...
One glaring problem with this method, however, is that most clients are going to want some indication of likely costs up front so that they can include it in their budgets. This is fine if the estimated costs prove to be accurate, very good for the client if the estimate proves to have been an over estimate as they will end up paying less, but difficult where the actual costs end up much higher than envisaged. There are two ways of avoiding such issues. Firstly, adhere to the principle of transparency and warn the client as soon as it becomes obvious that the budget is going to be exceeded. Any agency worth their salt will know well before the budget is exceeded if it going to happen. Secondly, always make the initial quotes 'comfortable' to cover all eventualities. Quoting for software development is always difficult, but if you always err on the safe side and make it clear that you will only bill actual time spent on the project, the client is unlikely to feel aggrieved.
Some clients will always demand fixed cost estimates, but where a good relationship exists between client and agency, I champion the cause of open communication and complete transparency regarding costs. This way, you can avoid arguments over costs and budgets and focus on developping the best possible solution, which is what we should all be striving for...